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Rajaram and anr. Vs. Ganpati and ors. - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtMumbai High Court
Decided On
Case NumberCivil Rev. Appln. No. 111 of 1967
Judge
Reported inAIR1973Bom269; 1973MhLJ696
ActsProvincial Insolvency Act, 1920 - Sections 4, 53, 54-A and 56
AppellantRajaram and anr.
RespondentGanpati and ors.
Appellant AdvocateB.A. Udhoji, Adv.
Respondent AdvocateG.A. Paonikar and ;V.V. Kaore, Advs.
Excerpt:
.....1920 - it was held that the creditor or the official receiver was required to prove the absence of good faith in this context ; e) the case discussed the requirements for transfer of insolvent's property in favour of one of the creditors for partly satisfying his genuine debt with full knowledge of the insolvent's indebtedness to the other creditors under section 53 of the provincial insolvency act, 1920 - it was held that the result of such action was preferring one creditor to the others and the good-faith or bad-faith of the insolvent was not material in deciding the necessity of such transfer - further, the transfer of the property could be made on the basis of the good-faith of the creditor in doing so - - the other question that arises in the case is whether the transfer, which..........the transfer, which is sought to be challenged by the creditors is for valuable consideration and good faith. the whole case has been referred to us for decision and we, therefore, deal with both these aspects of the matter. a very few facts need be stated to appreciate the points involved.2. the opponent no. 4 umakant gajananrao pathak was indebted to certain creditors. on may 24, 1960, he executed a deed of sale of a house in favour of rajaram and balwant for a consideration of rs. 30,000. on the same date, he also executed an unregistered document in favour of the said two persons who are the applicants in respect of his saw mill and a shed for an amount of rs. 10,000. the saw mill and the shed are said to have been further transferred by the applicants rajaram and balwant to one.....
Judgment:

Padhye, J.

1. This revision arises out of an insolvency matter. It has come to us on a reference being made at the instance of Masodkar, J. vide his order dated October 19, 1972. The learned Single Judge has stated the facts in his referring order and saw the conflict in the case-law on the question whether in a case where after adjudication no receiver is appointed, a creditor, without obtaining prior leave of the Court, can move an application under Section 53 and/or Section 54 of the Provincial Insolvency Act. The other question that arises in the case is whether the transfer, which is sought to be challenged by the creditors is for valuable consideration and good faith. The whole case has been referred to us for decision and we, therefore, deal with both these aspects of the matter. A very few facts need be stated to appreciate the points involved.

2. The opponent No. 4 Umakant Gajananrao Pathak was indebted to certain creditors. On May 24, 1960, he executed a deed of sale of a house in favour of Rajaram and Balwant for a consideration of Rs. 30,000. On the same date, he also executed an unregistered document in favour of the said two persons who are the applicants in respect of his saw mill and a shed for an amount of Rs. 10,000. The saw mill and the shed are said to have been further transferred by the applicants Rajaram and Balwant to one Marotirao and Mandakini by an oral transfer. The applicant No. 1 Rajaram is dead and his legal heirs have been substituted in his place. It appears that these were taken to be acts of insolvency on the part of the opponent No. 4 Umakant and the Non-applicants Nos. 2 and 3 made an application to the Insolvency Court on October 6, 1960 for adjudicating the opponent No. 4 as an insolvent. To the same effect an application was made on October 31, 1960 by the non-application No.1. By an order dated December 14, 1961, the non-applicant No. 4 Umakant was adjudged an insolvent. No receiver, however was appointed by the Court.

3. These two transfers were challenged by the creditors-opponents Nos. 1 to 3 by an application under Sections 53 and 54 of the Provincial Insolvency Act, Mr. Udhoji for the applicants, however, stated that he confines his case only in respect of the house and not with respect tot he saw mill and the shed. This application was registered as Miscellaneous Judicial Case No. 31 of 1962. Several challenges were made on behalf of the transferees - both on law and facts and the Insolvency Court by its order dated August 23, 1965 held that the transfers were neither for valuable consideration nor in good faith an it annulled the transfers.

4. The transferees filed an appeal before the District Judge challenging the order of the Insolvency Court and the Miscellaneous Civil Appeal No. 147 of 1965 was dismissed by the District Judge by his order dated December 24, 1966. He, however, differed from the finding of the first Court on the question of consideration holding that the transfers were for valuable consideration but good faith was lacking. The transferees, therefore, have challenged these orders by this application for revision. The applicants-transferees contend that the creditors had no locus standi to make the applications for annulment of the transfer under Section 53 and 54 of the Provincial Insolvency Act. It was also contended that in any case, without prior leave of the Court, which must be express, an application by the creditor or creditors would not be tenable. It was further contended that there must be an express order by the Court showing an application of mind granting leave to the creditors to prosecute the application for annulment of transfer. It was further contended that the applications for annulment could not be maintainable under Section 54 of the Insolvency Act as the applications were filed more than three months after the date of the transfer and if at all, the application could only be under Section 53 of the Insolvency Act.

5. The following facts are beyond dispute, viz., there was no receiver appointed; no application for leave was made; even in the application for annulling the transfers, there is no prayer asking for leave of the Court and there is no express order of the Court granting leave.

6. The transferees also had not raised any objection either in their written statements in the lower Court or at any time there or before the appellate Court that the application was not competent because no leave was sought or granted. The Courts below treated the application as one under Section 53 of the Provincial Insolvency Act, since the time for making an application under Section 54 had already expired.

7. Obviously, since the application has been made more than three months after the date of transfer, Section 54 could not be attracted. The application being within two years after the date of the transfer, it would fall under Section 53 of the insolvency Act. Section 53 protects the transferee from a debtor who was subsequently adjudged insolvent if the transfer is in good faith and for valuable consideration.

8. Mr. Udhoji for the applicants contended that it is only the receiver who can make the application for annulment of transfer and no other person including the creditor is entitled to make any application. Section 56 empowers the Court to appoint a receiver for the property of the insolvent at the time of adjudicating the debtor as an insolvent or any time afterwards and if such a receiver is appointed, the property of the insolvent vests in the receiver. If the property vests in the receiver, then it is the receiver who alone can represent the creditors and he along is, therefore entitled to make petition for annulment of a transfer. Mr. Udhoji, however, stated that where no receiver is appointed, then, there cannot be petition for annulment of a transfer, because, according to him, the receiver has to be appointed in every case and in the absence of receiver, there is no remedy for any of the creditors. This contention, in our view, goes a little too far. It is not necessary that the receiver must be appointed in each and every case at the time of or after adjudication. Section 58 of the Act itself makes it clear that in the absence of a receiver the Court has all the rights of and may exercise all the powers conferred on a receiver under this Act. That means, where a receiver is not appointed in respect of the insolvent's property, the property of the insolvent vests in the Court itself and the Court has to realise the assets of the insolvent and distribute them amongst the scheduled creditors.

9. It is then contended on behalf of the applicants that even if an application for annulment of a transfer could be made by a creditor, where nor receiver is appointed still such an application cannot be made unless prior leave of the Insolvency Court is taken for filing such an application. For this purpose, he relies upon the provisions of Section 54-A of the Provincial Insolvency Act. Section 54-A deals with the provisions under Section 53 as well as 54. Section 54-A provides :

'(finding to Section 53) A petition for the annulment of any transfer may be made by the receiver or, with the leave of the Court, by any creditor who has proved his debt and who satisfies the Court that the receiver has been requested and has refused to make such petition.'

On the construction of the section, the learned counsel contends that the creditor, who wants annulment of a transfer, must fulfill the conditions of obtaining leave of the Court before the application is filed. On a close reading of Section 54-A, it appears to us that his contention is not well found. In our view, Section 54-A deals with a case where a receiver has been appointed by the Insolvency Court an adjudication. It does not apply to a case where no receiver is appointed and the property vests in the Court itself under Section 56. This section lays down two conditions for making an application for annulment. The first is that such an application must be made by a receiver. Secondly, it says that if a receiver does not make an application, then any creditor, who has proved his debt can make an application provided he satisfied two conditions. One is that he must obtain the leave of the Court and the second is that he must satisfy the Court that the receiver has been requested and has refused to make such a petition. The latter part of the section itself shows that Section 54-A applies only to a case where the receiver has been appointed and has no application to a case where the receiver is not appointed. Therefore, in a case where no receiver has been appointed, there is no bar of Section 54-A to making an application by a creditor, even without the leave of the Court.

10. Section 53, no doubt, says that a transfer not in good faith and for valuable consideration, will be voidable as against the receiver and may be annulled by the Court on a petition presented within two years after the date of the transfer, but that contemplates a case where a receiver has been appointed annulling that transfer even if no receiver is appointed because in such a case, the Court itself takes the place of the receiver by virtue of section 58 of the Provincial Insolvency Act and the Court would be entitled to annul the said transfer if it is not in good faith and for valuable consideration. No decision has been brought to out notice that a creditor is not entitled to present a petition for annulment of a transfer under Section 53 of the Act in a case where no receiver has been appointed. The decisions which are cited before the learned Single Judge and have been referred to in the referring order, have been cited again before us, but almost all the cases deal with the situation where a receiver has been appointed and the creditor, without fulfilling the conditions under Section 54-A of the Act, moved the Court by a petition for annulling the transfer. There are, however, two decisions, one of the Nagpur Judicial Commissioner's Court and the other of the then Nagpur High Court, which are important. The decision of the Additional Judicial Commissioner, Nagpur in Sitaram v. Mt. Nathibai, is a case in point. It has been laid down therein that Section 54-A does not abrogate Section 58 and must be read subject to the provisions of that section. It lays down that the words 'voidable against the receiver' in Section 53 must therefore, in view of Section 58, be read as 'voidable against the receiver or the Court as the case may be' and a creditor is entitled to move the Court, to take action under Section 53 where a receiver has not been appointed. The other decision is in Amthubi v. Sitaram, AIR 1951 Nag 268, wherein it has been held that where no receiver has been appointed in the case, any creditors including those who had not been scheduled can make the application for annulling the transfers made by the insolvent.

11. Apart from this Section 4, in our opinion, gives a very vide power to the Insolvency Court to annul a transfer which is not for valuable consideration and in good faith. The Court can even take suo motu action for annulling such a transfer. If any creditor brings it to the notice of the Court that a transfer made by the insolvent is for the purpose of defeating or delaying the creditor and is not in good faith or for valuable consideration, the Court, in whom the estate of the insolvent vests, can take action if it so thinks fit for annulling the said transfer. No question of seeking any leave of the Court arises in such a case. On a close consideration of the provisions of the Provincial Insolvency Act, we are, therefore, of the view that it is not necessary in every case to appoint a receiver on adjudicating a debtor an insolvent. Further we are of the view that in a case where no receiver is appointed, it is not necessary for a creditor to obtain leave of the Court prior to making an application for annulment of transfer. We are further of the view that even assuming that leave of the Court is necessary when the creditor makes an application and the Court, acting on that application, proceeds to determine the question whether the transfer is voidable or not, the Court will be deemed to have granted leave to the creditor to proceed with the application for annulment of transfer. In either case, the application presented by the creditors for annulment of a transfer cannot be said to be untenable. The Insolvency Court was, therefore, competent to entertain an application on behalf of the creditors.

12. The Insolvency Court could only annul the transfer if the transfer was not for valuable consideration and not in good faith. The Insolvency Court took the view that the transfer was not in good faith or for valuable consideration. The application for annulment was allowed setting aside the transfers in favour of the present applicants. In the appeal the learned District Judge held that the transfer was for valuable consideration but it was lacking in good faith inasmuch as the insolvent was indebted to the extent of Rs. 47,000 besides the debt owed by him to the transferees. There is a consensus of opinion that in the case of the annulment of a transfer the burden of proof is on the official receiver or the creditors to prove the absence of good faith follows and the creditor or the receiver has to prove by cogent evidence that there was want of good faith in the transaction. Of course, there could not be any direct evidence of want of good, faith, but the circumstances must be such as lead to the only conclusion that the transfer in favour of the transferees lacked in good faith. The appellate Court has given a finding on consideration of evidence that the insolvent owed a much larger amount to the transferees than the consideration for which the transfer had been taken. The debt was legally due to the transferees debt was legally due to the transferees and in fact the property of the insolvent and in fact the property to the insolvent of which he made transfer was not enough to liquidate the debts due to the transferee. The transferee was one of the creditors of the insolvent. Nothing has been brought out on record to show and none of the courts below has given any finding that the transfer taken by the transferees from the insolvent was for the purposes of benefiting the debtor. Nothing has also been shown to prove that the transfer in question was a device for screening the property of the debtor-insolvent from his creditors for the purposes of ultimately benefiting the debtor. It has also not been shown that the transfer was taken for been fitting the debtor by defeating the other creditors. Here is a case where a large amount was due from the debtor to the transferee and the transferee was entitled to protect his own interest even in preference to the other creditors. The sale-deed in favour of the transferee, no doubt, recites that the insolvent was on the date of the transfer indebted to others but the transfer with such knowledge of the insolvent's indebtedness to be a ground for annulling the transfer. It is a case of preferring one creditor to the other or others. The good faith or bad faith of the debtor-insolvent is immaterial. What has to be seen is whether the transferee acted in good faith in taking the transfer. If in satisfaction of the amount due to him, the creditor takes a transfer from the debtor, without undervaluing the property, it cannot be said that he is acting in bad faith even though the effect might be to defeat the other creditors. A creditor is entitled to safeguard his own interest. In Vinayak v. Moreshwar, decision, it has been held that when the transferee was not a mere volunteer and has an interest to protect, then it must be shown in addition that 'the real object of the transfer is to place the property beyond the reach of the creditors for the benefit of the debtor and is not for the payment of his debts', but for protection of his interests. A reliance was placed by both the sides on a decision of the Supreme Court in N. Subramania Iyer v. Official Receiver, : [1958]1SCR257 . This decision does not assist the creditors. On the contrary, it would support the transferee in this case. The Supreme Court has laid down the test as to when the transfer can be said to be lacking in good faith. The Supreme Court has given instances where the transfer could be said to be lacking in good faith. One of the instances is of a transaction which is of a benami character. The Supreme Court stated in paragraph 7 as follows : -

'Such will be mostly cases of benami transactions in favour of some relative of the insolvent or a person in whom he has full confidence that he will hold it ultimately for the benefit of the insolvent or persons in whom he may be interested. Or it may be that a persons finding himself over head and ears in debts wishes to convert his assets into liquid assets with the collusion or connivance of the transferee.'

They further observed :

'In both cases, the intention clearly is to shield the assets against the claims of creditors and in such cases, though the transfer may have been for consideration, either adequate or otherwise, but having been entered into with a view to defraud or delay the creditors, the transferor and transferee sharing the common intention, the transaction must be annulled and the assets must be brought into the common hotchpot for the benefit of the insolvent's creditors.'

The dominant intention must be to benefit the debtor as against the creditors for example, a debtor and transferee, who is not a creditor, knowing that the debtor is indebted to a number of creditors, entered into a transaction of sale and the shale of the consideration, though adequate, is paid into the hands of the debtor so that both the property as well as its price is screened from the creditors, and the debtor gets in his hands the amount for his own purpose, such a transaction could be said to be lacking in good faith. But where the amount of the consideration does not go into the hands of the debtor but is utilised for satisfying the debt due to one of the creditors, though it may have the effect of defeating the other creditors, the transfer in favour of the said creditor could not be said to be lacking in good faith. It would only be preferring one creditor to the other and could not be said to be a fraudulent preference. The Judicial Committee of the Privy Council in Musahar v. Lala Hakim Lal ILR Cal 521 : AIR 1915 PC 115 has laid down as far back as 1915 that

'the transfer which defeats or delays creditors is not an instrument which prefers one creditor to another, but an instrument which removes property from the creditors for the benefit of the debtor. The debtor must not retain a benefit for himself. He may pay one creditor, and leave another unpaid.'

It has further been laid down that

'when it was found that the transfer impeached was made for adequate consideration in satisfaction of genuine debts, and without reservation of any benefit to the debtor, it followed that no ground for impeaching it lay in the fact that the plaintiff (appellant), who also was a creditor, was a loser by payment being made to the preferred creditor - there being in the case no question of bankruptcy.'

It therefore, follows, that this is not a case where the transfer can be said to be not in good faith. Having found that the consideration of the transfer was adequate and having further found that the insolvent owed a genuine debt to the transferee in satisfaction of which the transfer was made in favour of the transferee, the learned District Judge was in error in holding that the transfer was not in good faith. The learned Judge took an erroneous view of the law and the finding of want of good faith cannot therefore, be upheld. We accordingly set aside the orders of the Courts below and hold that the transfer in favour of the applicants was for valuable consideration and also in good faith and, therefore, the transfer was not liable to be annulled.

13. The revision application, therefore, succeeds and is allowed with costs against the non-applicants Nos. 1, 2 and 3.

14. Revision allowed.


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